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Subrogation and dual insurance

This case involved an indemnity dispute between Zurich Australian Insurance Ltd (Zurich) and Metals & Minerals Insurance Pte Ltd (MMI), where there were two insurance policies that could respond to a claim for personal injuries suffered by employees of Speno Rail Maintenance Australia Pty Ltd (Speno) whilst working for Hamersley Iron Pty Ltd (Hamersley). The Western Australian Court of Appeal provided further guidance on the effect and interpretation of s45 of the Insurance Contracts Act 1984 (Cth) (Act) and dealt with the issue of subrogation.

Speno agreed to indemnify Hamersley in respect of liability arising from personal injury to Speno’s employees (contractual indemnity), and also added Hamersley as an insured under Speno’s public liability policy held with Zurich.

Hamersley was later found liable for personal injuries suffered by two of Speno’s employees. Pursuant to the indemnity provided to Hamersley, Speno and Zurich were ordered to indemnify Hamersley. However, Hamersley also had a public liability policy with MMI under which it did not make a claim for the injuries suffered by Speno’s employees because that loss had already been covered by the contractual indemnity.

Accordingly, Zurich covered the losses resulting from the workers’ injuries pursuant to the contractual indemnity. However, Zurich could not subrogate Speno’s rights and pursue Hamersley directly for contribution because subrogation rights had been waived against Hamersley by virtue of Hamersley being a named insured under Speno’s policy with Zurich. Zurich therefore sought contribution directly from Hamersley’s insurer, MMI under the principles of dual insurance.

In response to Zurich’s claim, MMI commenced an action against Speno and argued that: (1) it held the subrogated rights of Hamersley as an insured; and (2) its policy was an excess policy as defined under the ‘underlying insurance clause’.

The Court disagreed with MMI on the issue of subrogation confirming the principle that an Insurer cannot be subrogated as to the rights of its insured without indemnifying the insured for the loss. Further, the Court disagreed that these rights would exist if MMI was forced to pay Zurich a contribution. The right to subrogate is given only to the indemnifying insurer.

Zurich relied on s45 of the Act to defeat MMI’s argument that its policy was an excess policy, arguing that s45 voids any provision that has the effect of limiting or excluding liability by reason of another contract of insurance where the other insurance is not specifically referred to. Section 45 of the ICA provides:

“(1) Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of the State or Territory, the provision is void;

(2) Sub-section (1) does not apply in relation to a contract that provides insurance cover in respect of some or all or so much of a loss that it is not covered by a contract of insurance that is specified in the first mentioned contract.”

The Court of Appeal therefore dealt with the issue of whether the ‘underlying insurance clause’ could survive even if it offended s45 of the Act. The Court of Appeal overturned the decision at first instance and held, given the specific wording in this case (where the clause in the MMI policy referred to insurance taken out ‘on behalf of’ as opposed to ‘by’ the insured), it was possible to sever the ‘underlying insurance clause’. Accordingly, MMI’s policy did operate as an excess policy and would only respond if Zurich’s policy was exhausted by the personal injury claim.

The points to note from this case are:

In cases of dual insurance, only the insurer who provides indemnity for the full amount of the loss will have the right of subrogation.

Section 45 of the Act does not necessarily void ‘underlying insurance clauses’ where they are carefully worded and these clauses may therefore be used to avoid dual insurance disputes.